By Byron T. Deese, Special to the AFRO
The IRS has announced new contribution limits for retirement accounts, effective this year. Before you make any 2019 contributions to an IRA, 401(k), or another tax-advantaged account, be sure to go through this article to help guide your contribution decisions.
Retirement Plan Contribution Limits
Starting in 2019, the IRS now permits up to $6,000 in annual contributions to an Individual Retirement Account. People aged 50 and over can contribute an additional $1,000, for a total of $7,000.
Uncle Sam’s new contribution limit to a 401(k) plan is $19,000 per year, an increase of $500 from the previous limit. Catch-up contributions start at age 50 and are capped at $6,000 annually, for a total of $25,000. The absolute maximum that can be deposited in a 401(k) plan per year, including both employee and employer contributions, is now $56,000 or 100% of the employee’s salary, whichever is less.
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Before you contribute a dime to an IRA, you may want to consider adding some funds to your workplace 401(k) first. Why? Because many employers match employee contributions dollar-for-dollar up to a certain limit. This results in a 100% return on your investment, which is hard to beat in just about any market.
Say for example that your employer is matching a maximum of 3% of your gross salary, dollar for dollar. You’ll want to contribute that much from your paycheck each month before making any IRA contributions.
After reaching your company match limit on your 401(k), next, consider depositing funds in an IRA. Why do this before reaching $19,000 in 401(k) contributions? In some 401(k) plans, your investment choices may be limited. In an IRA, they won’t be. Check your 401(k) plan for details. If you have the same investment choices as your IRA, you can reach your $19,000 limit and then work on your IRA.
New IRA Deduction Rules for Taxpayers Who Have a Workplace Plan
Starting in 2019, the IRS also has new IRA deduction rules for people who have a workplace retirement plan. Generally, contributions to a traditional IRA are tax-deductible. But if you have an employer-provided retirement plan and earn above a certain limit, the rules start changing.
If you file single or head of household and have a workplace retirement plan in addition to your IRA, contributions to the IRA are fully deductible with a modified adjusted gross income (MAGI) of $64,000 or less. A partial deduction is permissible between $64,000 and $74,000; and above $74,000, Uncle Sam cancels the deduction altogether.
If your status is married filing jointly, the government gives you a full deduction below $103,000 with no deduction above $123,000.
If you don’t have a retirement plan at work, you may not be off the hook just yet. If your spouse has a workplace retirement plan, the IRS will give you the full traditional IRA deduction only if your combined income is below $193,000. Above $203,000, you get nothing.
New Roth IRA Rules
The income limits for Roth IRA eligibility have been raised as well. Starting in 2019, the phase-out range for married couples is $193,000 to $203,000. For taxpayers filing single or head of household, the numbers are $122,000 and $137,000.
One exciting part of the Tax Cuts and Jobs Act is the legalization of backdoor Roth IRAs. If your income exceeds the Roth IRA limits mentioned above, you can first make non-tax-deductible contributions to a traditional IRA, and then convert the account into a Roth.